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9 Traps First-Time Homebuyers Fall Into -- and How to Avoid Them

Oct 25, 2019 by Maurie Backman
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Finding and buying a home is a huge undertaking. It can be overwhelming, especially if you're new to the process. But the last thing you want to do is choose the wrong home and experience home buying regrets after the fact.

Here are some dangerous traps first-time homebuyers should avoid.

1. Taking on too much house

Your housing costs shouldn't exceed 30% of your take-home pay. By "housing costs," we're talking about your mortgage payment, property taxes, and homeowners insurance. Keep that figure in mind when you decide how much you can afford to spend on a home. If you exceed that 30% threshold, you'll risk falling behind on your housing costs, your emergency fund savings, or other bills. None of these options are good. 

Also, don't forget that home maintenance is a costly, time-consuming expense associated with owning a home. For a large standalone property, that could mean more time spent cleaning, doing repairs, and mowing the lawn.

Think about your schedule, and if it’s not conducive to that sort of time investment, consider opting for something smaller -- unless you’re buying a home well below your budget and can afford to outsource some upkeep. 

2. Not putting down 20% on your mortgage

You're not always required to make a 20% down payment on your home, but if you don't, you'll typically need private mortgage insurance, or PMI. This is a premium you pay to protect your lender, and it typically costs between 0.5% and 1% of your home loan's value per year. This means a $200,000 mortgage could cost you an extra $1,000 to $2,000 a year if you don't put down a 20% down payment. Rather than take on that added expense, consider delaying homeownership until you've saved enough for a down payment big enough to avoid PMI. 

For those who are currently serving or have served in the U.S. military, the U.S. Department of Veteran Affairs (VA) backs a VA loan, which is a $0-down mortgage option for those who qualify. And no PMI is required.

3. Not boosting your credit score before applying for a mortgage

The state of your credit is a major factor for lenders in determining whether you qualify for a mortgage and the interest rate you get. If your credit score is outstanding, you'll snag the most competitive rates out there. If it's only okay, you'll pay a lot more in interest for your home loan. Over time, that really adds up.

Imagine you borrow $200,000 for a home and your strong credit lands you a 3.75% interest rate on a 30-year fixed mortgage. That translates into a monthly payment of about $926. But if your credit score isn't as good, and you're approved for a loan with an interest rate of 5.25% instead, your monthly payment will be just over $1,104. That's a huge difference, both in the short and long term.

Before you apply for a mortgage, take a look at your credit report. If your score is below 700, consider holding off until you can raise it. Work on paying down some of your existing debt or making a bunch of on-time payments. Both will drive your credit score up. 

4. Accepting the first mortgage offer you get

The mortgage application process can be a hassle -- but it pays to go through it several times to ensure that you're getting the best rate. If you accept the first home loan you're given, you'll have no way of knowing whether you could've qualified for a lower interest rate, so shop around -- especially if you have strong credit. Even a fraction of a percentage point could save you a ton of money in the course of a 30-year loan. 

In our example above, we saw that a $200,000, 30-year fixed mortgage would cost $926 a month with a 3.75% interest rate. But if you qualify for the same loan at 3.65%, your monthly payment will be about $915. That's not a huge difference -- but remember that with a 30-year mortgage, you're saving that amount over 360 payments. That's over $3,200 you'll save.

5. Not understanding what it means to be part of an HOA

It's not uncommon for homes in newer developments to be part of a homeowners association, or HOA. HOAs are the governing bodies in housing communities. The dues you pay to them help cover things like communal amenities and common area upkeep. But those dues can be expensive, so before you agree to purchase a home that requires you to join an HOA, know what costs you're signing up for.

Keep in mind that HOAs aren't just about money; they can also be restrictive. Many HOAs set rules that dictate how your home must appear (at least on the outside) and whether or not you're allowed to have a pet. HOAs can also impose annoying parking regulations, which could be problematic if you’re a multi-vehicle family. Don't just see what that HOA costs; find out what its rulebook looks like.

6. Forgetting about closing costs

When you close on a home, there are expenses you must cover as part of that transaction -- things like appraisal fees, loan origination fees, and recording fees. Closing costs typically equal 2% to 5% of a home's purchase price, so factor them into your budget. Also, while you can often tack closing costs onto your mortgage, keep in mind that this means paying interest on them over time. 

7. Not hiring a professional home inspector

Enlisting the help of a home inspector costs money, and if cash is tight, you may be inclined to rely on your own walkthrough instead. Bad idea. While certain issues, like water damage, can be easy to spot, there are plenty of potentially costly problems that can be harder to identify.

For example, a home inspector might unearth problems with:

  • electrical wiring,
  • plumbing issues,
  • sinking foundations, or
  • failing roofs.

A home inspector might also uncover hazardous substances, like asbestos or mold, that can be tricky and costly to remove. It's crucial to get an inspection before buying. If you don't, you could close on that home only to find yourself on the hook for thousands of dollars in repairs shortly after the fact. 

Furthermore, once you get the results of your home inspection, don’t hesitate to use any negative findings as a negotiation tool. If your inspector finds mold that will cost $3,000 to repair, insist that your seller subtract that amount from your home’s purchase price or otherwise agree to rectify the situation before you close. 

8. Letting a real estate agent pressure you to buy the wrong home

Working with a real estate agent can make your home search more efficient. But don't let that agent talk you into buying a home you can't afford or don't want. Remember, real estate agents don't make money unless they sell you a home, and while many conduct themselves with integrity, it's not unheard of for an agent to apply pressure in the hopes of snagging a commission. 

If you feel like you're being pressured at any point during the home search process, find yourself a new agent. And don't ever buy a home because your real estate agent thinks it's a good choice -- he or she doesn't have to live there, whereas you do. 

9. Not reading up on or exploring the neighborhood

It’s easy to fall in love with a home based on its layout and features and then decide that it’s the right place for you. But if you buy a home in the wrong neighborhood, you’ll likely wind up unhappy in it. 

Imagine you’re a young family looking for a home in a thriving neighborhood with strong job growth, great schools, and lots of amenities geared toward children. If you don’t take the time to do your research, you might inadvertently end up buying in an area with an older population, mediocre schools, and a poor job market. 

Another thing: See what traffic and parking are like in the area you’re looking to buy in. If you have young children, you might not want to move someplace with a town center that’s impossible to park in, leaving you to lug two young kids in a stroller for seven or eight blocks every time you need to stock up on bread or milk. 

Spend some time exploring each neighborhood you’re thinking of buying in, both during the week and on weekends. That’s the best way to get a sense of what life will actually be like if you move there. 

It's easy to stumble on the road to buying a home, especially if you're new to the process. Avoid these mistakes and, with any luck, you'll wind up with a home that suits your needs without breaking the bank.

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